Hedge funds steal the show

Top performing equity hedge funds have dwarfed returns of the market in the past quarter.

As the best performing hedge fund last year, the NAOS Emerging Companies Long Short Equities fund has held its rank, returning 23.7 per cent in the March quarter, Australian Fund Monitors reports.

This compares to 1.95 per cent for the S&P/ASX 200 Index and a 1.2 per cent fall in its benchmark, the S&P/ASX Small Ordinaries Accumulation index, over the same period.

NAOS managing director Sebastian Evans said the group was speaking with several ratings agencies in its bid to gain retail distribution.

“We’re a five star-rated fund according to Morningstar [ratings and research agency]" Mr Evans said. Financial planners had contacted NAOS independently and invested based on their own due diligence, he added.

“We’re getting more high net worth individuals with experience in the equity markets who are willing to invest a larger sum of money because they’re looking for more diversification away from resource companies."

NAOS has been bolstered by industrials and biotech stocks over the last five years, and Mr Evans said there were still opportunities in these sectors.

The star performers for NAOS in the past quarter included telecommunications service provider
Vocus Communications
, antibody therapy developer
Patrys
and entertainment company
Village Roadshow
.

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The fund also has a large holding in former non-bank lender
RHG
, which faces the potential overthrow of its board by activist shareholders. “You might see the sale process for its assets revitalised [given] people might be keener to negotiate with that company now," Mr Evans said.

The fund exited positions in Paladin Resources, Extract Resources and UraniumSA in line with its stop-loss policy.

“There could be a major buying opportunity brewing in the uranium sector, but we need to reassess the situation without capital at risk so we can make an objective decision," Evergreen Capital chief investment officer Tim Hannon said.

Mathews Capital’s Velocity Fund, in third place, notched up 9.9 per cent in the first quarter. The fund’s chief investment officer, Ben Henri, said events in Japan had focused attention on coal, its commodity of choice.

“There are not many other places to go if you don’t use nuclear [power] and you want to get large-scale electricity generation capacity installed," Mr Henri said. “[This] can only be beneficial for thermal coal and liquified natural gas, which we have exposure to through
Santos
and
Woodside Petroleum
."

The Velocity Fund has 42 per cent of its investment in coal stocks and 29 per cent in gold.

Australian Fund Monitors chief executive Chris Gosselin said evaluating hedge funds based on a headline return masked funds’ volatility. Investors should look at risk-adjusted returns and a range of factors like correlation to the market’s worst months, the frequency of losing months and drawdown – the peak-to-trough difference between returns over a specific period, Mr Gosselin said.

“NAOS, for instance, looks attractive, but had a drawdown in 2008-09 of over 60 per cent. Funds such as Herschel, Bennelong and Optimal not only had quite small drawdowns in 2008 but provided investors with a positive return for the year."

Many hedge funds are trying to expand into the retail market after a focus on their traditional market of wholesale and high net worth investors hurt them during the credit crisis.

Attracting institutional support from superannuation funds in Australia continues to be fraught, however, with local super funds often preferring larger, more established hedge funds offshore.